EMPLOYEE THEFT - HOW IT NEGATES THE GAINS PURCHASING AGENTS PRODUCE

Employee Theft

How it Negates the Profits Gains Purchasing Agents Produce

By Jeff Davis, Purchasing Agent

The primary mission of purchasing agents is to negotiate the best prices for the highest quality goods and/or services for their respective company. The steps involved in accomplished this are...

• Study historical sales records and inventory levels of current stock and/or supplies still in use to gain an understanding in usage trends.
• Identify foreign and domestic sources
• Keep abreast of changes affecting the supply and demand for needed products, materials, and services.

To be effective, purchasing professionals must consider the following when choosing suppliers for the procurement of products, and services...

· Price

• Quality
• Availability
• Reliability, and
• Supplier’s technical and industry knowledge
• Pre and post-bid technical and customer support
• Warranties

Buyers need to research and investigate to contribute to their employer’s bottom line profits. Purchasing, along with various other departments, is tasked with reducing costs that adds positively to employers *bottom lines.

*Essentially, the bottom line refer to a company profit or loss. After deducting taxes and expenses from gross sales, the bottom line affirms the net earnings for a given financial period, that permits investors a window through which they may accurately determine a company’s financial status. The bottom line is the sum of all the data; it defines the amount of net profits companies realize from their endeavors, or if the operation is currently operating in the red.

Other ways of improving the *bottom line are...

• Financial oversight and management of departmental budgets
• Cuts in departmental budget, or at the very least eliminating discretionary funds that are called upon to handle expenses not covered in existing budgets.
• Eliminate positions by combining responsibilities, cutting back on the availability of overtime, without affecting internal/external customer service levels.
• Reduce overall expenses
• Develop new revenue streams
• Launch new goods or services
• Locate and penetrate new market segments

Note: New revenue sources should only be incorporated if none or negligible expenses are incurred and will provide a good return on investment to the company.

Within the first few paragraphs, there were a few areas I touched upon that contribute positively to a companys’s *bottom line. In outlining points which can contribute to companies profitability there is a single deteriorate that can seriously impact cost reductions, one that has caused the demise of one of three businesses nationally. This anomaly referenced is Internal Employee Theft.

An August 1999 study by Kessler International showed not only do employees steal, they out steal shoplifters. In fact, employee theft is the cause of one out of every three business failures in America today. Their disclosed, employees readily admitted to stealing office supplies, falsifying expense reports, taking inventory; almost 87% of those surveyed admitted to falsifying time sheets, regularly stealing time from their employers by being paid for hours they did not work. Those surveyed also indicated these practices are increasing at alarming rates. Previous studies reveal the price tag on employee theft in America exceeds $120 billion annually.

Internal shrink, commonly defined as the mysterious disappearance of goods and/or supplies from inventories, results from a combination of employee theft (87 percent), shoplifting, vendor fraud and/or administrative error. A 2002 Retail Security Survey showed employee theft as the single largest category of larceny in the United States, more than motor vehicle theft, household burglary, and bank robbery combined. This can involve scrapping perfectly good inventory consisting of raw materials and finished goods and selling it using sales return schemes and purchasing frauds. The results are frequent out-of-stock conditions and unexplained increases in cost of goods sold with corresponding reductions in gross profit margins.

In light of the above, how may purchasing agents fulfill their mission without having their efforts sabotaged by employee theft? As a result, many companies are incorporationg lean manufacturing methods and techniques, internal audits and just-in-time inventories (to reduce carrying costs). Shrinkage, in addition to its real costs, inevitably causes delays in the supply chain which has been known shut down production and potentially cost companies and their customer’s huge losses. Such activities, left un-attended, have a devastating affect on that which PA’s work feverishly to accomplish.

Theft of office supplies alone can cost companies billions of dollars a year and has been found to be a major factor in a multitude of business bankruptcies. The savings initially negotiated by purchasing agents disappears quickly when companies must replace and purchase new office supplies almost instantly. Such losses are generally substantial over time; for those companies that treat it passively the damage is, most times, devastating.

In an attempt to illustrate the major factors of employee theft, it should be noted that purchasing fraud should be listed as contributor to employee theft. Such fraudulent activities, committed by a few purchasing professionals, give the many who are dedicated a bad rap. Excepted that disclaimer, purchasing fraud is, as well, a major factor and should not be ignored. Unsavory PA’s have the ability to destroy to destroy a company’s *bottom line by doing such things as acting in collusion with vendors, rigging bids, giving something of value to influence a purchasing decision, falsifying purchase and payment records, taking advantage of suppliers’ mistakes and tricking them into accepting unfavorable terms.

From past experience, when companies feel the effects of deteriorating *bottom lines there is little mention of intensifying internal controls and oversight over the cause’s of internal theft. Hopefully this writing encourages its readers to take this decline more seriously; it operates silently in dark corners, its effects are devastating, and generally when sources are identified the damage is irreparable.

Some key ways to prevent employee theft:

· The first step to preventing employee theft is to screen job applicants thoroughly before hiring them in the first place. Background checks should be performed and should include a check on criminal history, civil history, driver’s license violations, as well as verification of education, past employment (including reasons for leaving) and references.

Consider running a credit check on prospective employees, as people with financial difficulties are more prone to fraud. In order to do this, your are legally required to notify the job applicant in writing that a credit report may be requested. You also need to receive the applicant’s written consent.

· Studies show that the more employees believe they will be caught, the less likely they are to steal.

Be clear with employees that your company has zero tolerance for employee theft of any sort. This includes not only outright stealing, but also things such as taking a long lunch break without approval, using sick leave when not sick, doing slow or sloppy work and coming to work late or leaving early.

Write and distribute a company policy that outlines exactly what constitutes stealing. Contact your local police department if you do discover an incident of employee theft so you send a message to your employees that stealing will not be tolerated.

Business owners and senior management must themselves be role models of honesty and integrity, or they may risk setting up a work environment that justifies illegal and criminal activity.

· Avoid at all costs allowing the finances of a business to be handled and controlled by a single individual. Separation of duties is critical, and no employee should be responsible for both recording and processing a transaction; i.e., don’t allow the same person who sends out bills to collect the mail and prepare bank deposits.

· Independent audits done once or twice a year are sufficient to review all documents.

· Make sure all checks, purchase orders, and invoices are numbered consecutively and regularly checked for missing documents.

· Use a “for deposit only” stamp on all incoming checks to prevent an employee from cashing them.

· Investigate customer complaints for which credit has not been applied against payments.

· Most incidents of employee theft are revealed by coworkers, but many are still hesitant to report these incidents to their employers. Set up a system whereby employees may report employee theft anonymously. You may also want to consider a reward for information regarding criminal activity that results in a conviction.

· Unopened bank statements and cancelled checks should be received by the business owner each and every month and should be carefully examined for any red-flag items such as missing check numbers. They should also look at all checks issued to see if the payees are legitimate and make sure the signatures are not forgeries. To prevent these problems from occurring, bank statements must be reconciled each and every month and vendors or suppliers need to be legitimized prior to conducting any business transaction; i.e., credit applications, bank and customer references, etc.

· Require all checks above a nominal amount to have two signatures. Never sign a blank check. Sign every payroll check personally. Avoid using a signature stamp. A company controller or someone else high enough within the financial control group should have the authority to sign company checks.

· Get an insurance policy that covers outside crime, employee theft and computer fraud. It will be there as a safety net in case your fraud prevention tactics don’t work.

· Small business owners should take the time to review accounts payable by checking cash disbursements and payments. A very common scheme to look out for is billing-scheme fraud where an employee sets up fictitious “phantom” vendors.

· Be alert to disgruntled or stressed employees, or those who have indicated that they are having financial difficulties. Also look for any unexplained significance changes in an employee’s living standards.

· A positive work environment has been shown to deter employee fraud and theft. Open lines of communication, positive employee recognition and fair employment practices will assist in the reduction of occupational fraud.